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Coach Profit Falls 12% as North American Sales Drop

Coach Inc. dropped the most in six months after saying second-quarter revenue fell at its established stores in North America and that the trend would continue as increasing competition hurts handbag sales.

Coach slid 7.9 percent to $53.30 at the close in New York, the biggest drop since Jan. 23. The New York-based company’s shares have fallen 4 percent this year, compared with an 18 percent gain in the Standard & Poor’s 500 Index.

The largest U.S. luxury handbag maker has been losing ground in its main business as Michael Kors Holdings Ltd., Fifth & Pacific Cos.’ Kate Spade and Tory Burch LLC offer more styles of their own and increase distribution. Coach said today in a statement that sales at stores open at least a year in North America sank 1.7 percent in the latest quarter. The average estimate of analysts surveyed by Retail Metrics was for a 0.6 percent increase.

“This is the metric investors will focus on,” Jennifer Davis, an analyst with Lazard Capital Markets in New York, said in a telephone interview today. “It will fuel investor concern about market-share losses.”

Davis rates the shares the equivalent of hold.

Coach, which embarked on a restructuring earlier this year to transform itself into a lifestyle brand, also announced today that is cutting jobs, closing some North American stores and replacing more top executives. In addition, it reached a deal to sell its Reed Krakoff brand and said it still was open to acquisitions.

Continuing Trend

Coach’s negative sales trend will continue in the fiscal year that ends in mid-2014, Chief Financial Officer Jane Nielsen said on a conference call with investors and analysts.

The company is working to become a dual-gender lifestyle brand by adding more shoes, jewelry, fragrances and outerwear. Coach said a fuller presentation of the concept would be in the stores for the holiday season.

“We do see this as a multi-year journey,” Chief Executive Officer Lew Frankfort said on the call. “Until we actually experience traction with our stores, we are not going to forecast it.”

Net income in the three months ended June 29 slid 12 percent to $221.3 million, or 78 cents a share, from $251.4 million, or 86 cents, a year earlier, the company said. Excluding some items, profit was 89 cents a share, matching the average of 31 analysts’ estimates compiled by Bloomberg.

Revenue increased 5.8 percent to $1.22 billion, less than the $1.24 billion average of analysts’ estimates.

Executive Changes

Coach said Chief Operating Officer Jerry Stritzke and North American President Michael Tucci will leave the company in August. Coach also agreed to sell its Reed Krakoff brand to a group led by Krakoff, who will depart the company as executive creative director when the deal is completed.

Coach is closing 16 underperforming stores in North America as it slows square footage growth to 7 percent from 10 percent this year, Nielsen said on the call. The company has cut 200 jobs, she said.

Chief Commercial Officer Victor Luis will succeed Frankfort as CEO in 2014.

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